Coming Soon To eBay: The Taxman

[Purveyor]

With the economy worsening, more and more people are likely trying to make ends meet by selling goods via eBay, Amazon.com, Google Checkout and other online services. The Internal Revenue Service is fixing to wield a big new weapon to get its cut.

Desperate to generate revenues by narrowing the "tax gap" (and at the urging of the Bush administration), Congress last year passed legislation requiring processors of third-party payments and settlements--mainly payment card companies and services like Paypal--to report to the IRS individuals and business entities that receive at least $20,000 a year in credit- or debit-card charges from 200 or more transactions. The mandatory reporting, buried in the Housing Assistance Tax Act of 2008, would begin in 2011.

The IRS is already soliciting comments on how to implement the law. The primary mechanism likely would be a once-a-year issuance of a variation of Form 1099 reporting gross receipts paid.

Here's the big implication: If the IRS sees a credit card or Paypal 1099 issued for an individual who has filed a tax return that doesn't include a Schedule C (Net Profit From Business-Sole Proprietorship) or includes one showing too little in sales, or to a business reporting too little in sales, the agency might target the recipient for an audit. If an audit target fails to produce acceptable documentation of his or her business proceeds and expenses, the IRS might well include all the revenue reported on the 1099s, disallow any undocumented business expenses and then assess taxes, interest and possibly penalties on profits a taxpayer didn't even have.

A large number of mom-and-pop Internet sellers won't reach the $20,000, 200-transaction threshold for payment card reporting. But if you're one who might, or you simply want to avoid any IRS hassles, how best to protect yourself?

MORE...

FORBES: http://www.forbes.com/2009/03/17/irs-ebay-audits-personal-finance-taxes-internet-sellers.html

[msongs]

1. it's selling personal goods versus running a for-profit business.

a once a year yard sale to get rid of excess junk versus a yard sale EVERY week selling brand new merchandise.

Fixing a neighbor's car now n then versus running a repair shop in your home.

People running a business on ebay should already have appropriate business policies in place.

Msongs

[Venceremos]

2. I personally think this is a good thing

I sell on ebay and have had a federal tax ID since my first year selling. The first comment to the story you linked points out, in correct detail, the tax benefits of having a legally organized business, and filing a Schedule C every year. The tax benefits apply even if you make less than the the $20K/200 transaction threshold.

[anigbrowl]

4. True that. Online business tax free for the longest time anyway...

and if you're making $20k a year, that's a nice chunk of change. Some people will point out that they may be selling > $20k a year but that their profit margin on that might be much, much smaller - but then they won't have any significant tax liability, and producing the documentation for the IRS is probably as simple as opening up a few windows and hitting 'print' or 'send email' since your whole transaction hsitory is online.

OK, you may not be doing as well as a few years ago with the economy and all, but that's the essence of business - knowing how to make a profit in testing times.

[derby378]

3. I don't care much for the "200 transaction" threshold

During election years, I sell bumper stickers. I don't realize much profit off of them - I do it because it's fun. 200 bumper stickers in one year really isn't a huge amount, or at least not large enough for the IRS to bother auditing me for.

Now, if I'm making $20K/year on bumper sticker sales, I'll get that Federal tax ID and be happy to share the details with Uncle Sam.